U.S. Auto Industry Heads Green; But With Difficulty

Joseph Alfords, a North Carolina resident, says his 80 minutes, 44 miles daily commute has been putting a pinch on his pocketbook. So he traded his Toyota Tacoma truck for a smaller hybrid car last month – a Ford Focus Hatchback.

“Fuel economy was a significant factor in my choice,” Alfords said. “With the switch, I should be saving $100 per month in fuel costs alone.”

It might not be 1979, but Americans would tell you there’s been an oil crisis going on this year – with the price of gas hitting a peak of $3.94 early April. While the average price has shaved off 20 cents this month, Americans are still frowning at the pump and many are deciding to go greener. In turn, this is gradually creating a trend towards the increased purchase of fuel-efficient cars. But challengs remain with this product.

“There’s an absolute correlation between gas prices and consumers deciding to go towards hybrids,” said Andy Graff, Vice President of Sales at Galpin Motors, CA.

Gas Prices and Hybrid Car Sales Correlation in the last 8 years. Source: US Transportation Statistics. (Click Picture to see it bigger)

Galpin Motors along with many other dealerships across the country have seen the demand for hybrids and plug-in cars soar this year. In fact, over 117,000 of them were sold nationwide since January, a 48 percent increase over the same period last year.

Despite the hike, these numbers remain relatively low considering hybrids and electric cars make up just about 3 percent of new car sales this year.

There are still not enough fuel-efficient cars being sold in the United States to reach new federal guidelines, said John Atkinson, a public policy consultant at a natural gas company VNG. Regulations revised by President Obama’s administration set fuel economy standards at 34.1 miles per gallon and 54.4 mpg by 2025. Last month’s mpg averaged at 21.2, up from 20.5 mpg in April 2011.

Source: FuelEconomy.gov

While sales of fuel-efficient cars tripled over the last six years, the United States also continues to lag behind on the world’s green stage.

Currently, Europeans averaged at 23.4 mpg with their vehicles, the Japanese stood around 25 mpg, and the Koreans at 27.6 mpg.

Tom Libby, an analyst at Polk.com thinks that meeting Obama’s 2016 standard will be tough. In fact, in order to reach it, automakers would have to more than quadruple the past years’ gas mileage gains.

Source: Kelley Blue Book

That said, Detroit is on an inevitable path to a “greener footprint.”

“This is an added pressure for American automakers,” said Atkinson. “Improving fuel efficiency is no longer an option.”

Nonetheless, Libby says there is a clear trend towards the push for fuel-efficient vehicles. While small cars used to be the nightmare of US automakers, they are now making a welcome comeback.

“There’s new demand for more compact cars that are fuel-efficient,” said Libby. “The Big Three are all showing double digit increases.”

Indeed they are.

GM’s Chevy Cruze compact cars are up 10 percent this year – marking the sixth consecutive quarter of record-breaking sales. Ford’s Focus has seen its best compact car sales performances in years, surging 90 percent this year. According to a Michigan-based researcher LMC Automotive, the market for smaller compact cars has risen 6 percent in the last 4 years – raising the number to 26 percent this year from last year in March.

THE GREEN DEBATE

But while the push towards making fuel-efficient cars is under way, concerns about relying on limited, imported resources to fuel cars has raised debates about biofuel, electricity and other alternatives such as natural gas.

Although new models continue to be introduced each year, these advances in technology still have a number of obstacles to overcome.

Getting to the “green” simply may not be as green as one thinks.

While biofuel made its mark back in the early 2000s with ethanol (alcohol made by fermentation), it has gained increased attention because it has been associated with oil price hikes, deforestation and loss of biodiversity. According to a recent report by the International Centre for Trade and Sustainable Development, a non-profit organization in Geneva, the production of ethanol increased the price of corn by 21 percent in 2009. Not only does ethanol account for more than 30 percent of U.S. corn production, it is also 50 percent more expensive to produce than fossil fuel. And many argue that deforesting crops is counteracting ecological benefits.

Natural gas—which can be found in natural rocks—has also raised several concerns, especially when it comes to its extraction. Fracking shell gas—a technique that involves pressurized fluids to release the gas—has been condemned by the Environmental Protection Agency for contaminating waters and releasing methane into the atmosphere. The vast amounts available on the American continent make it an incredible competitive advantage for the U.S. and would prevent further dependence on Middle Eastern oil. But the relatively expensive process along with its environmental problems continue to divide Republicans and Democrats.

Meanwhile, as electrical cars sound like a great idea—they don’t emit exhaust and run on rechargeable batteries—they can still cause harm to the environment depending on whether the electricity comes from coal or not. Moreover, the disposal of lithium batteries, which are used to power the cars, remains a very “un green” process and a highly controversial issue.

GOING GREEN IS STILL TOO EXPENSIVE

While the Obama Administration has been heavily pushing for the development of hybrid and electrical cars, many believe it remains too expensive to take hold. As new models are being introduced, the high costs associated with green cars make this new trend one that will grow rather slowly in the United States.

The premium attached to green cars, both hybrid and electric, is high and according to analysts takes 7 years to pay off. For some consumers that are looking to change cars every 5 to 6 years, this option becomes uninteresting.

In addition, charging stations for electric cars, which allows people to boost their batteries on the go, remain difficult to find – and very costly to build. For the moment, consumers rely primarily on at-home charging stations – which cost about $2,000 to install.

Lux Research—an independent emerging technology research company—estimates that although President Obama is pushing for 1 million battery-powered cars in 2015, that number will most likely be fewer than 200,000.

Electric cars are expensive indeed.

Yet, Toyota’s Prius—a fully hybrid electric car from Japan—is selling very well in the U.S. It continues to outsell all the Big Three’s green car attempts such as the Ford Fusion, and even the Chevy Cruze and Malibu. For the past 12 years, Toyota has sold more than 1.2 million Prius in the U.S. Meanwhile, Ford has sold less than 170,000 of its hybrids in the same period. Chevy sold less than 12,000 in the same time.

Thanks to its smaller batteries—which only add about $2,000 to the cost of the vehicle—Prius’ retail price is much closer to conventional gas cars. Meanwhile, American batteries run around $15,000 and thus make the total cost of the car more expensive than a traditional one ~ which is close to $50,000.

“Is it a complete success? Absolutely not,” said Jack Daniels, CEO of Jack Daniels Motors in New Jersey. “It still remains very expensive and I think I can speak on behalf of other companies when I say electric cars only make up a mere percentage of current sales.”

Source: Ward's Auto

A recent TD Economics report demonstrates that consumer choices for cars have not significantly changed in the past ten years. One would agree that for the majority of Americans, going green is simply a reaction to gas prices, rather than an act of environmental consciousness.

If anything, taking a closer look at the success of the Toyota Prius in America can tell us that producing cheaper greener cars could trigger the “green” trend to take off more rapidly on the Western Hemisphere. Gas prices might affect the way American drivers are increasingly opting for cars with better gas mileage, but still a mere percentage is actually going green — and buying more fuel-efficient cars like hybrids and electric cars.

Click on graph to make it appear bigger

Despite all the debates on which alternative energy to adopt, one thing remains certain: the US is a smaller and newer player to this green movement.

“There is a real demand for energy consumption in the U.S.,” said Laszlo Albouze, an analyst at Valeo – a European automotive component manufacturer. “But Americans still consume a large amount of fossil fuel and compared to Europeans, Japanese and Koreans, they are just getting started.”

With Obama’s fuel-efficiency regulations in place, Americans have no choice but to mold themselves to a greener market. But the culture is still new. And volatile gas prices still heavily influence consumers’ decisions on the types of vehicle they purchase.

At the end of the day, while great advances in fuel efficiency have been made, much remains to be perfected – and agreed on. Analysts still predict a 5 to 7 years time frame to lock America’s stance on the green stage.

“The market for fuel-efficient cars will be tough to beat for Americans in at least the next 10 years,” said Atkinson.